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State Name: New Jersey
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State Abbreviation: NJ
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According to the FDIC, there are around 96,341 bank branches in the country vs. 97,340 a year ago (999 were closed). But SNL reports bank and thrift M&A activity remains below the pace of last year with 189 deal announcements through mid-November versus 212 at the same point last year. We have certainly had a few in the last couple week, listed here in no particular order.

Franklin Synergy Bank ($618mm, TN) will buy MidSouth Bank ($258mm, TN) for an undisclosed sum. (After the all-stock transaction, Franklin will own 64% of the combined bank, while MidSouth will own 36%).

Bank investor Kenneth Lehman reportedly will buy a controlling stake in Marine Bank & Trust ($138mm, FL) for an undisclosed sum. Marine has been operating under a C&D since March for unsafe lending practices and insufficient capital.

But all is not peaches and cream in the banking world. Over 400 banks have failed since 2007 and much of the blame was placed on problems in the credit portfolio. However, one of the other ingredients in the failure of many of these banks was a high cost of funds and wholesale funding. Of course, things are different than they were for banks in 2007. Now they have plenty of liquidity in the form of deposits, but six years ago loan growth was through the roof and many banks could not keep up with the deposit growth. As a result, many banks used every available avenue to bring in funds: brokered deposits, FHLB advances and CD rate specials in banks’ own market footprint were all common. These funding sources cost more than core deposits but times were good so bankers really didn’t care very much as long as loan growth continued.

But they should have cared, as Pacific Coast Bankers Bank reports that, for the banks that have since failed, the median interest bearing deposit (IBD) cost of funds (COF)ranking for these 421 banks was in the 90th percentile. “Clearly these banks’ cost of funds was problematic, and that in turn drove behavior that one could argue was a search to find enough margin to overcome those high costs, ultimately resulting in taking on riskier and riskier assets. Then, when credit portfolios began to crumble, the wholesale funding base began to erode. Without a solid base of core deposits, these banks could not find merger partners given the credit crunch and for some, the FDIC could not find buyers.”

But now the cost of funds of many banks is less than 1% - I basically make 0% on my bank account. Few banks carry brokered deposits and high rate specials have mostly gone away as banks are very liquid. As PCBB writes, “The key to success is to remember this lesson and recall that work on funding costs must be constant. This is one of the few areas banks can control and it has a big impact on your loan performance; consider that banks with solid core funding can make a reasonable margin with a lower lending rate given lower funding costs.”

The Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) have made good on their formal intentions on deposit advance loans. On November 21, 2013, the two agencies issued final guidance that may make it impossible for banks they supervise to continue offering these products on a large-scale basis, if at all. As in prior conversations over this topic, the Federal Reserve Board has remained silent, and has allowed the OCC and FDIC to steer the regulatory conversations. Ballard Spahr writes, “The OCC and FDIC report that they received more than 100 official comments on their proposed guidance (including two separate comment letters we submitted). However, there is no evidence of any serious reconsideration of the guidance. Rather, the OCC and FDIC issued final guidance substantially as proposed.” As previously speculated, the guidance would include the following limitations on deposit advance loans: customer must have had a deposit account with the bank for at least six months, customers with any delinquent or adversely classified credits should be ineligible, and a limit of six deposit advances per year. Ultimately, the regulations being imposed onto this channel of business for banks will make it impractical to continue such services. Ballard Spahr’s full article can be found here.

As a reminder, since the banking industry continues to ruminate on it, on November 19, the Department of Justice, in conjunction with other federal authorities, and state authorities in California, Delaware, Illinois, and Massachusetts, announced a $13 billion settlement of federal and state RMBS civil claims against JP Morgan. These claims have been pursued as part of the ‘state-federal RMBS Working Group‘, which is part of the Obama Administration’s Financial Fraud Enforcement Task Force. Buckley Sandler writes, “The DOJ described the settlement as the largest it has ever entered with a single entity. Federal and state law enforcement authorities and financial regulators alleged that the bank and certain institutions it acquired mislead investors in connection with the packaging, marketing, sale and issuance of certain RMBS.” The claims in the case state that JP Morgan employees knew loans backing certain RMBS did not comply with underwriting guidelines and were not suitable for securitization, however, that did not stop the pass through of these loans into mortgage pools. The agreement includes $9 billion in civil penalties and $4 billion in consumer relief. Of the civil penalty amount, $2 billion resolves DOJ’s claims under FIRREA, $1.4 billion resolves federal and state securities claims by the NCUA, $515.4 million resolves federal and state securities claims by the FDIC, $4 billion settles federal and state claims by the FHFA, while the remaining amount resolves claims brought by individual states. The bank also was required to acknowledge it made “serious misrepresentations.” The agreement does not prevent authorities from continuing to pursue any possible related criminal charges – plus legal bills? Here you go.

And as another reminder, since it is so important, in late October the OCC issued updated guidance on third-party risks and vendor management. According to the agencies publication they expect “bank to practice effective risk management regardless of whether the bank performs the activity internally or through a third party.” They note that a bank’s use of third parties does not diminish the responsibility of its board of directors and senior management to ensure that the activity is performed in a safe and sound manner and in compliance with applicable laws. The guidelines note a few specific areas where banking institutions are expected to make improvements to their vendor management programs related to third-party relationships. Those areas include: the development of plans that outline and identify inherent risks associated with the third-party activity and detail how the banking institution will select, assess and oversee the third party; ensure and perform proper due diligence in selecting a third-party provider; negotiate written contracts that clearly outline the rights and responsibilities of all parties; and continually monitor third parties' activities and performance.The exact press release and full article can be found here.

And for those following the Volcker Rule and its potential impact on hedging, at least three regulatory bodies (the Fed, OCC, and FDIC) will meet 12/10 to discuss final language. The two other agencies involved in this process (SEC and CFTC) may meet next week too although reports suggest this latter group wants more stringent language and is objecting to the draft circulating among the Fed, OCC, and FDIC.Banks now have until 7/21 to comply w/the rule although that date will likely be pushed out.

Friday we will have the unemployment data. Is the unemployment number accurate anymore? Is it relevant? Was the New York Post correct in their accusation that it had been manipulated in 2012? I don’t know. But what I do know is it has been over five years since the U.S. economy entered a recession. It “officially” ended in the middle of 2009, but few would argue that we’ve had anything close to a “full recovery“. Official unemployment remains high, but the disconcerting number isn’t the so called “frictional unemployment” but rather the long-termed unemployed; those out of work for six months or more, according to the St. Louis Federal Reserve, is four times more than what it was before the recession. So it was with great interest that I read Wells Fargo Securities Economics Group’s Nov. 7 paper “Is the Unemployment Rate a Reliable Barometer?”

Like most good research papers, they answer their own questions (“Do I do that? Yes, I do.”), and in the process draw a number of conclusions. A few in particular: the u/e number may not be the most reliable measure of the labor market, and, the relationship between GDP and the u/e rate has not been as useful for the private sector.

But between now and then, originators and lock desks have to contend with slightly higher rates. Why did we have the selloff yesterday? With little other news, the markets focused on “2nd tier” numbers that normally don’t have a big influence. First off, the Institute for Supply Management’s factory index rose to 57.3 in November, a 2 1/2 year high. What partial government shutdown? It was also the sixth consecutive month of quicker growth in the goods-producing sector since a contraction in May. (Any reading above 50 indicates expansion.) And we learned that Construction Spending was up 0.8% in October, following a decrease of 0.3% in September, and that the October pace was the best since May 2009. Spending has increased 5.3 percent in the 12 months ending in October. Private construction was down 0.5%, Public construction spending was up 3.9%.

Fortunately MBS sales, and thus apparently locks, weren’t setting a torrid pace, and in fact TradeWeb reported that agency MBS supply for the day remained muted at maybe three quarters of $1 billion - but the damage was done and mortgage prices were worse by about .5 and the yield on the 10-yr at 2.80%. There isn’t much in the way of scheduled news today, and rates have come back down slightly with the 10-yr at 2.78% and MBS prices better by a couple ticks (32nds).

About the Author

Rob Chrisman began his career in mortgage banking - primarily capital markets - 27 years ago in 1985 with First California Mortgage, assisting in Secondary Marketing until 1988, when he joined Tuttle & Co., a leading mortgage pipeline risk management...
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